The much-anticipated auction of extra radiowaves to power the next generation of mobile devices could be delayed after two of the country's biggest telecoms companies accused Ofcom of offering rival mobile operators up to £1bn of "illegal state aid".

BT and O2 have issued the broadside against the communications watchdog as it prepares to sell off the spectrum for 4G technology early next year.

O2 said Ofcom's proposals to ensure that all four of Britain's operators are left with minimum spectrum "floors" will artificially depress the auction prices, leaving the exchequer £1bn out of pocket.

O2 said: "We believe that the proposed spectrum floors are a state aid and are therefore illegal under European Union law. The spectrum floors would distort the auction process, allowing all bidders bar Vodafone and O2 to potentially acquire spectrum at discounted prices."

BT said Ofcom's proposal to force the holder of an 800MHz spectrum licence to provide 2Mb mobile broadband coverage in rural areas would force down the price of the auction, thereby giving the holder a public subsidy. "This is an anti-competitive subsidy against other rural broadband technologies, in particular fixed broadband," BT said in its submission, seen by the Guardian and expected to be published today.

Ofcom denied its proposals amounted to aid. "We are fully aware of state aid rules and would not have made proposals that we considered illegal," it said.

Matthew Howett, senior telecoms analyst at Ovum, warned that the level of opposition to Ofcom's proposals was likely to delay Ofcom's already "highly ambitious" auction timetable. "If any of the operators go ahead with their threats to launch legal challenges the auction could be delayed by at least a year, which will leave the UK languishing even further behind other European countries which have far more advanced mobile phone networks."

The auction is expected to reap the government a fraction of the £22.5bn raised in the 3G auction in 2000. Last year mobile companies paid €4.4bn (£3.7bn) for similar licences in Germany. The 800MHz spectrum is being made available by the switch from analogue to digital TV.